The economic meltdown on Wall Street may have happened miles away, but Pearland city officials are more than a little concerned about the impact at home.

At issue, City Manager Bill Eisen said, is the city’s ability to secure insurance for bonds sold by the city in the wake of the bailout. He put it like this:

When we sell bonds, we typically buy bond insurance that automatically makes bonds rated AAA. Now, because bond insurers have gotten themselves in trouble by insuring risky loans, it’s not to our advantage to use bond insurers. We have to look at other ways to get the best rates.

President George Bush signed into law a bill allowing the U.S. Treasury to spend up to $700 billion to purchase bad assets from the nation’s banks to restore confidence in the credit markets.

The impact of the bailout would have hit Pearland even harder if the city was heavily laden with adjustable rate bonds, Eisen said. He elaborated:

We haven’t done what others (cities) have done. We don’t have a lot of adjustable rate bonds. They are the ones that really got burned in this market because rates have gone up so much and people are being real cautious. When they adjust, the rate they might get is a lot higher.

City Councilman Kevin Cole shares Eisen’s concerns about the market. Here’s what he said:

Without the bailout, there could be the possibility that it would hinder the city from borrowing money moving forward at decent interest rates. One of the big questions I have is whether or not our bonds could be insured as more and more insurers of bonds are going out of business.

What’s your take on the city’s predicament? Are you losing much sleep over your own finances in light of the bailout?

7 Responses

It sounds to me like the city has been conservative in its bonds and that is paying off right now. As far as future bonds, I think they are in the same credit crunch as the rest of the business world. I would be curious to hear and understand how that affects the bonds passed last year. As far as insuring the bonds, it doesn’t do much good if the insurer goes out of business.

I’m not losing sleep, I will say that I strongly disagreed with the financial “rescue” or “bailout”. I didn’t appreciate my two Texas Senators voting for it, but a BIG thumbs up to my District Representative who was strong enough to go against his party lines. I think that the stock market has been inflated by greed and corruption and this is just the market leveling out to honest numbers. If banks went back to underwriting loans instead of just relying on credit scores, if they only gave mortgages to people who had proven they are ready for a mortgage and saved for a down payment, if the borrowers didn’t have to “have it now”, I think we’d all be in better shape right now. Our economy has NEVER only gone up without dips down, recessions are just an unfortunate part of life and throwing more tax dollars at one, won’t stop it. There are actually benefits to a recession for those who saved during the up times. With the housing bubble bursting they can buy homes as rentals. People can find great deals and purchase stock at rock bottom pricing. Gas prices will fall. Rest assured our economy will recover, it always has.

I think this is going to affect the city of Pearland and other governments more next year when people start fighting the inflated tax appraisals we’ve seen over the last 10 years. The downed housing market will make it difficult for tax-assessors to inflate these numbers again. Of course to operate truly governmental functions at the same level of service the city will either have to raise tax rates (public won’t like that) or start cutting spending on the little perks in life…like sports complexes and natatoriums.

Bonds are one of the more confusing economic instruments to me, as to their mechanics and uses. With that said, I won’t even try to pretend that I have any advanced knowledge on this subject and hope that other Bloggers can enlighten me on the inner workings of them. But, without speaking about discount rates, face values, inverse interest, etc, my question lies with a cities need to furnish bonds and what happens if no purchasers are ready, willing, or able to pick them up? Revenue bonds are easy, we will have no services. Other bond issues mean no roads, infrastructure, or maintenance. So, what will the next natural step be for a City which is caught in a situation such as this? File bankruptcy? Increase taxes? Inflict user’s fees? Fold?

If a city does experience a financial heart attack and goes insolvent as a result (i.e. Can’t fulfill financial obligations), is it possible for that city to loose its charter; thereby, making it available for annexation by other larger and solvent cities?

I think a correction in the market is (was) overdue. I think all of us, businesses, governments, and individuals, need to learn the lessons of this fiasco and begin to live within our means.

Maybe this will force the City of Pearland to focus on the provision of basic city services, which is its function in any event, and leave behind all the boondoggle spending plans that we have all talked about so much on this blog. Governments, just like those of us who fund them, have to cut back on unnecessary expenditures. Lord knows we can all survive with less than we have.

I remain confident in the economic vitality of this country. As NoWay PEDC says, things will come back. I just hope we learn some lessons and don’t go back to the same ‘ol way of doing things. But I suspect we will.

I don’t know about this bond stuff either, but I guess it means that the city can’t get money to build things. We were kind of hoping that the city would build a library on our side of town, but at a homeowner’s association meeting, a councilperson told us this would not happen due to the fact the existing library was going to be renovated. I have had a 10-cent fine there for over a year – that is the last time I have been to the library because it almost a 25-minute drive from my house in Pearland traffic. That to me says another needs to be built.

Thanks No Way. I am hoping that the economic crisis never actually gets that bad to where we have to worry about insolvent cities and municipalities. Buuuttt, it just does not seem to me that the markets are responding favorable to the recent bailout attempt.

Well, several questions were asked and I’ll try to shed some light on some of my thoughts as we move forward.

1. No one really knows what is going to happen as long as the market makes big moves every day. It will reach a bottom and then we can start looking at what may happen.

2. The City of Pearland has taken a very conservative approach to selling bonds and making sure we have sufficient bond coverage. Also, sufficient reserves.

3. The Council has already asked our financial advisors to model several scenerios so we can see what that will mean looking forward. Hopefully we are prepared any way the future goes.

4. Even though the voters approved certain projects in 2007, doesn’t mean we must move forward immediately on all those projects. When discussing the bond proposal, we always have said we could do more or less in a given year depending on the financial markets at that time.

5. What happens to a City that gets into a financial crisis? They can always raise the tax rates. They can cut spending. Both, raise rates and cut spending. Sit and do nothing The interests rates a City pays is directly related to their credit worthiness, just like individuals. The healthier the overall financial picture is for a City, the better the financial rating, then the better the interest rates. If a City becomes too deep into financial crisis, the State can declare a City insolvent.

Please don’t worry about the City of Pearland, we are very healthy as a City financially. We maintain strong cash reserves in all fund balances and pass conservative budgets. Can we find places to cut back, absolutely. We look at it all the time. Just in the last 2 budget cycles, the staff has cut about $600,000 in recurring expenses. They have done this by just asking the question, “Do we really need this any longer?”

Sorry for the long post, but I wanted to put some things on the table for you to think about.